Bernhardi, principal of a venture capitalist firm, spoke Wednesday at the Security Symposium sponsored in Washington by the USENIX Association.

Bernhardi also has worked in banking and intelligence, and has done research on the dynamics of money laundering and the behavioral economics of black markets. He currently is developing methods for political hedging in foreign exchange markets.

The Policy Analysis Market was a Web-based futures market developed by DARPA as an intelligence gathering tool. Investors would buy futures in the likelihood of specific events or conditions occurring in the Middle East, and investing trends would be analyzed for indications of coming events.

Congressional and public outrage when the project was revealed last week led DARPA to pull the plug on it just two days before it had planned to begin enrolling investors.

"I understand the reaction," Bernhardi said in an interview. "Nobody likes to see someone profiting from a tragedy."

There have been allegations that some terrorists made money from selling short stock in companies insuring the World Trade Center buildings in New York prior to the Sept. 11, 2001, attacks.

"That has left a sour taste in everybody's mouth," Bernhardi said. "On the other hand, there is no better forum for assessing risk than a free and open market. The Defense Department was on the right track, but their timing was wrong."

Although futures markets in this country traditionally involve investments based on the future value of commodities such as petroleum or orange juice, similar markets focusing on the likelihood of events such as a death in the royal family already exist in England, Bernhardi said.

The fact that the market would be set up specifically to provide data would not necessarily skew that data, Bernhardi said.

"Markets tend to be pretty good at telling you the spot rate on a risk," he said.